Do Companies with only one director have authority to act?

In recent years there has been significant debate surrounding the decision-making capabilities of most private limited companies with sole directors. This is as a result of recent court interpretation of the model articles of association.

What are Articles of Association?

Every company must have a set of articles of association (Articles), the fundamental constitutional document regulating the internal affairs and governance of the company.

The Articles are a publicly available document that can be found on the Companies House Register.

A company can choose to adopt bespoke Articles, but if not the model articles set out in the Companies (Model Articles) Regulations 2008 (Model Articles) will apply by default to all companies incorporated since 1 October 2009.

 

What is the issue for sole director companies with Model Articles?

Two recent court cases have called into question whether companies with only one director that have adopted Model Articles (or bespoke or amended Articles with quorum requirements of at least two directors) can validly act or take decisions.

The issue centres on Model Articles 7 and 11. Model Article 11(2) states that the default quorum for directors’ meetings is two directors. Model Article 11(3) states that where the total number of directors appointed is less than the quorum, the directors must not take any decision other than to appoint more directors.  However, Model Article 7(2) provides that where a company has only one director that sole director may take decisions without regard to any of the other provisions of the Articles relating to directors’ decision-making.

Market practice has generally been to interpret Model Article 7(2) as trumping Model Article 11, enabling sole directors to take decisions on behalf of their companies without having to worry about quorum requirements.

 

Re Fore Fitness

In the first High Court case from 2022, Hashmi v Lorimer-Wing (re Fore Fitness), this market-standard interpretation was challenged. The court decided that a quorum requirement of two directors effectively meant the company needed to have more than one director in office and so Model Article 7(2) was disapplied.

Re Active Wear Limited

However in the subsequent High Court judgement in Re Active Wear Limited, the High Court found that where a company had always had one director and no provision of the Articles required it to have more than one (as with the Model Articles), then the company could rely on Model Article 7(2) to disregard the usual quorum requirements and other decision-making formalities.

The latter case provides some welcome reassurance, especially for companies that have only ever had one director, although in our experience banks and other important contractual counter parties have recently been unwilling to enter into contracts with sole director companies with Model Articles.

What should you do about it

We would recommend all sole director companies to take a prudent approach (unless and until the government or courts provide greater certainty) and carefully consider some or all of the following:

 

Looking forward

A sole director company can amend their Articles to disapply Model Article 11(2), allowing sole directors to make decisions so that they don’t fall foul of the quorum requirement.

Alternatively, if a company would prefer not to amend their Articles they could consider appointing additional director(s).

Looking back

Whilst amending the Articles can avoid potential issues in future decisions this will not eliminate risk for sole director decisions that were made in the past.

In order to reduce the risk of a challenge to the validity of past decisions, shareholder resolutions can be passed to ratify these decisions. 

If you want more information or assistance in relation to any of the above, or indeed any matters relating to your business, please get in touch with Varishma Assani, Corporate Associate Solicitor at Streathers.

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